How Credit Cards Work
Unlike debit cards that take money out of your bank account, a credit card is a separate line of credit. You use it to make purchases or obtain cash advances. You then pay off your balance or the credit card company charges you interest. The issuer requires at least a minimum payment to keep your account in good standing and then charges interest on the unpaid balance each month.
Opening a credit card is different for millennials than other generations. The CARD Act means that anyone under 21 must have independent income or a co-signer to get a card in his or her name now. Banks now offer secured credit cards. These cards allow you to deposit cash in an account and then that amount becomes your credit line. For example, a $1,000 deposit translates in to a credit line of $1,000. This option really helps if you are worried about overspending, but in reality acts very similarly to a debit card.
Why Credit Cards are Great
You build your credit score with a credit card. A debit card, by contrast, does not impact on your credit score. A strong credit score is critical to getting favorable terms for big ticket items such as car loans and mortgages. You save yourself high interest charges in the long-term if you take a disciplined approach to credit on smaller purchases like clothing and gas now.
Credit cards are convenient and offer benefits. If you are uncomfortable with carrying a large amount of cash, you can carry a credit card. You replace a lost credit card; however, you cannot replace lost cash. You can use credit cards to hold a hotel room or a rental car. Many credit card companies also offer perks such as frequent flier miles to persuade you to sign up for their card and most give 1-2% of each purchase in the form of rewards points that can be redeemed for cash, gift cards, or airline miles.
Pay Them Off On Time
Credit cards are a great tool to build a credit history if you pay them off on time. There are serious negative consequences to not paying off your credit cards on-time and in full.
- Late fees – Issuers charge a fee if you do not make at least the minimum payment.
- Interest charges – You need to pay off the balance to avoid interest charges. Per bankrate, the average APR is 13.02% on a fixed rate card or 15.82% on a variable rate card.
- Lower credit score – Issuers notify the credit reporting agencies if a borrower does not pay as agreed. This act reduces your credit score.
- Reduced employment prospects – Employers in most states can check your credit report. Some states such as California and Illinois restrict the practice. It is best to develop a strong background using credit to prevent harm to your career.
Overall, They Are a Plus
Credit cards can be a fantastic financial tool if you use them responsibly. You can earn a discount for every purchase you make, and the bonuses alone for signing up can make signing up for a credit card worth it. We earned over $2,500 in rewards in one year by signing up for and using credit cards responsibly, and if you know how to control your spending and pay off the balance each month, credit cards are certainly worth it!